Fewer PCs and printers, more high-priced contracts

During a meeting with financial analysts on Wednesday, HP CEO Meg Whitman said her plan to turn around the ailing company was on track, but the restructuring won't be complete until 2016 and investors should expect HP's earnings to shrink even further before the work is done.

In August, HP reported a loss of $8.9bn, with revenues down across nearly every division. During Wednesday's meeting, Whitman warned that this was likely to be a trend, and that investors should expect HP to earn between $3.40 and $3.60 per share for fiscal 2013, a decline in revenues of more than 10 per cent.

But Whitman says she has a plan to stop the bleeding – eventually – if HP's investors and its board will just stick with her. Whitman is HP's fourth CEO since 2005, having taken the job after the board booted its previous top exec, former SAP chief Léo Apotheker, in 2011. During her presentation, Whitman blamed the executive musical chairs at HP for causing "multiple inconsistent strategic plans and executional miscues limiting speed of recovery."

Whitman said the company lacked competitive focus and that it had spread its business across too many products, services, and regions. She also said it had seriously underinvested in IT and in R&D – a point that should please readers who mourn "the old HP."

Mostly, though, she said turning HP around would require changes across its entire business, setting the stage for a parade of HP execs who explained how each division is working to help the company right itself.

First up were Mike Nefkens and JJ Charhon of HP Enterprise Services, the struggling division that was forced to take an $8bn writedown in goodwill assets in August over HP's bungled 2008 acquisition of EDS. Their take on the turnaround plan was simple: Enterprise Services needs to earn more money.

Nefkens and Charhon said that "poor contracting practices" had caused HP to make "excessive pricing concessions," leading to "resource management challenges." In other words, HP needs to quit giving away the farm and charge its enterprise customers more.

The plan now is for Enterprise Services to whip underperforming contracts into shape with the aim of growing its revenue by 3 to 5 per cent annually. Long term, it wants about 80 per cent of that revenue to come from its core data center, applications, and business-process outsourcing businesses, with the other 20 per cent coming from higher-margin services such as security, mobility, data analytics, and cloud computing.

Over in the Printing and Personal Systems division, which handles HP's PC and printer businesses, executive VP Todd Bradley said HP plans to cut costs by consolidating and slimming down its product lines. That means it will reduce the number of printer models it sells by 30 per cent by the end of 2014, and chop down the number of PC platforms it offers by 25 per cent in the same timeframe.

Bradley said HP's PC business will continue to focus on adding sexy design to its products – something Whitman has been talking up lately, and an area where HP has long been lacking in comparison to brands like Apple and Sony.

Meanwhile, the printer group is hard at work trying to push more inkjet products, including expanding its Ink Advantage program for low-end customers into more countries and launching an Ink in the Office initiative to nab business customers. According to Bradley, HP's share of the ink market is already up more than 15 per cent since last year and he expects double-digit revenue growth in fiscal 2013.

Dave Donatelli, executive VP of the HP Enterprise Group, said the three big data center trends today are infrastructure convergence, cloud, and software-defined data centers, and that HP is driving all three. He also called attention to HP's pioneering Project Moonshot initiative to develop new servers based on low-power ARM and Atom chips, saying he expected such energy-sipping hardware to account for 15 per cent of the global market by 2015.

George Kadifa, executive VP of HP Software, said his division's main challenge would be integrating the various software outfits HP has acquired in recent years, including taking Autonomy – which cost HP a bundle in 2011 and has some analysts fearing another, EDS-style writedown in the near future – "from start-up to grown-up."

And last but not least, HP COO Bill Veghte delivered a status update on the company's Converged Cloud initiative, which HP says allows businesses "to build and consume all forms of cloud offerings." Veghte said HP brought in $4bn in cloudy revenue in 2012 and that he expects that figure to reach $8.4bn by 2015.

In all, Whitman said these changes should set the company aright, and that she expects HP's revenues to be growing in line with US gross domestic product by 2016. But if she hoped the markets would see Wednesday's pep rally as a sign of a positive future for HP, she was in for a disappointment.

Investors have generally viewed Whitman with skepticism, and despite her tough talk about a turnaround, HP shares have been in decline ever since she took the CEO seat last September. They plummeted another 13 per cent to close at $14.91 on Wednesday, their lowest point in almost ten years. ®